Effective 1 January 2024, the government will allow businesses to use functional currency in accounting. This is a small "appetiser" before the adoption of a major change to the Accounting Act, which is tentatively planned to take effect on 1 January 2025.
The concept of functional currency fundamentally changes the previously established method of keeping accounting exclusively in Czech currency, except for selected assets and liabilities arising in foreign currency, where current legislation, on the contrary, requires records to be kept in foreign currency.
Functional currency is defined in Section 24a(2) of the Accounting Act as the currency of the primary economic environment in which the entity operates. As stated in the explanatory memorandum to the amendment, this definition of functional currency is consistent with the definition in International Accounting Standard IAS 21: The Effects of Changes in Foreign Exchange Rates. This regulation is also referred to in the new Section 61d of the Decree, which does not provide its own definition of the criteria for determining the functional currency of an entity to avoid possible interpretative problems and undesirable departures from the factors and criteria defined in IAS 21.
The criteria for determining the functional currency of an entity are set out in IAS 21 based primarily on the environment that most influences the selling prices of goods and services (often the currency in which the selling prices of the entity's goods and services are set and paid), the competitive environment and the factors that are predominantly influenced by government regulation in determining the selling prices of goods and services offered by the entity, or the currency that most significantly influences the cost of goods and services (i.e. labour costs, material costs, etc.).
An entity may change its functional currency only from the first day of the reporting period. Under the amended Decree, an entity that changes its accounting currency is required to present information for the previous accounting period in the balance sheet, profit and loss statement, statement of changes in equity and cash flow statement in the accounting currency of the current period.
The use of a functional currency is a voluntary choice, not an obligation of the entity. For the time being, the amendment to the Act gives a choice of EUR, USD and GBP. The entity will have to demonstrate the change to the functional currency based on the above criteria. The Czech crown will become a foreign currency for entities with a functional currency as any other currency. Any change to another functional currency, including the Czech crown, may be made again only if the functional currency currently in use no longer meets the criteria.
The main advantage of introducing a functional currency is the substantial elimination of realised and unrealised exchange rate differences. Where an entity is part of an international group, the introduction of the same functional currency within the group is a major simplification in the preparation of internal group reporting and consolidation accounts.
Unfortunately, the idea of a functional currency was introduced far too quickly. So far, the tax regulations have not had much time to react to the amendment to the Accounting Act. It will still be possible to record and report VAT, pay payroll tax and insurance premiums only in Czech crowns. In the future, it should not only be possible to pay corporate income tax in the functional currency, but also to file tax returns completely in the functional currency.